Rapidly growing risks

Delivered on By Justin Pyvis

Good morning! ScoMo was in full attack mode yesterday in an attempt to paint himself as the superior economic manager to Labor leader Anthony “Albo” Albanese, who on Tuesday said he backed a 5.1% increase in the minimum wage without mentioning that the Fair Work Commission, not the PM, set the minimum wage:

“What we saw from Anthony Albanese yesterday was reckless.

It was incredibly reckless. We all want to see wages go up and indeed the Reserve Bank Governor has made it very clear that we are seeing wages starting to go up but the way you engage in economic policy is not in the loose way we saw from Anthony Albanese yesterday.”

Albo may have gaffed again, but that doesn’t necessarily mean he’s going to be worse on the economy than ScoMo, who in just a few short years has doubled Australia’s national debt and is no stranger to fiscal profligacy:

“New analysis by Australian National University economists released this week found that the JobKeeper program saved 812,000 jobs at a cost of $112,819 per job saved.

Remember, the government paid JobKeeper recipients $750 per week for 26 weeks.

If the cost of each job saved was $112,819 but the person in that job only received $19,500, what was the other $93,319 for?”

Would Albo have done worse? Perhaps: in just the past few weeks he showed that he didn’t know the cash rate or the unemployment rate, called for higher wages without mentioning productivity, and offered up the taxpayer as an equity partner to homebuyers despite evidence from overseas that it’s likely to be counterproductive.

So neither leader has a particularly stellar track record on economic matters, which means regardless of the result next weekend it probably won’t be a great outcome for anyone who values economic and fiscal responsibility from the federal government.


Reading the tea leaves

Daily % change

AUD/USD

69.3

-0.1%

AUD/CNY

4.67

0.0%

AU Bond

3.45

-0.9%

US Bond

2.92

-2.4%

ASX200

7,065

+0.2%

S&P500

3,935

-1.7%

Brent (bbl)

107.0

+4.4%

Gold (oz)

1,853

+0.7%

Iron ore (t)

132.0

+4.4%

Bitcoin

29,199

-5.9%

Ethereum

2,105

-10.2%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 fell -1.65% overnight, erasing early gains of as much as 1.2% after US inflation data for April showed prices rising 8.3% in April from a year ago, above expectations for an 8.1% increase. So-called “core” CPI, which strips out food and energy prices, rose 6.2%, against expectations for a 6% gain.

Locally, the ASX200 edged 0.19% higher, recovering from steep early losses thanks largely to the healthcare (+1.7%), real estate (+1.3%) and materials (0.9%) sectors.


Food for thought

Stablecoin TerraUSD became not-so-stable yesterday after attackers challenged its US dollar peg, causing a run.
Stablecoin TerraUSD became not-so-stable yesterday after attackers challenged its US dollar peg, causing a run. Source

“A stablecoin known as TerraUSD experienced a run and declined in value. I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks.”

The above quote is from Janet Yellen, the US Treasury Secretary and former chair of the Fed. And she’s not wrong. So-called algorithmic stablecoins such as TerraUSD (UST), pegged 1:1 to the US dollar, have similarities to the traditional financial system in that they’re only stable until a crisis, at which point they’re anything but.

The US Fed made that clear in its recent stability report:

“Stablecoins typically aim to be convertible, at par, to dollars, but they are backed by assets that may lose value or become illiquid during stress; hence, they face redemption risks similar to those of prime and tax-exempt MMFs. These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins. Additionally, the increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks.”

Like a traditional bank that engages in fractional reserve lending, UST was not fully backed by reserves, and the reserves it held were also risky – mostly bitcoin, which has fallen over 30% against the US dollar in just over a month.

That vulnerability – which was warned about in November 2021 and to which Do Kwon, the creator of UST, responded “go ahead, see what happens” – led to a George Soros-style attack, whereby someone (or group of people) took out large short positions in bitcoin and long positions in UST, beginning their attack during a pre-planned period of reduced liquidity as a result of the 4pool merger:

“With the Curve liquidity drained, the attacker used the remainder of their $1b OTC $UST position ($650mm or so) to start offloading on Binance. As withdrawals from Anchor turned from concern into panic, this caused a real de-peg as people fled for the exits

So LFG is selling $BTC to restore the peg while the attacker is selling $UST on Binance. Eventually the chain gets congested and the CEXs suspend withdrawals of $UST, fueling the bank run panic. $UST de-pegs to 60c at the bottom, while $BTC bleeds out.”

The attacker(s) may have made away with as much as $US1 billion on their short position, and unfortunately as is often the case in the crypto world, “The biggest losers from all of this will be retail [investors] that didn’t understand the risks they were taking.”

Essentially if a stablecoin isn’t fully backed by what it’s pegged against, it’s not a stablecoin. There’s probably a space for these undercolateralised stablecoins but by definition they’ll always be vulnerable to a bank run, and unlike a traditional bank there’s no central bank to bail out depositors. Buyer beware.


Chewing the fat


Bits and bytes

😓 According to the Westpac-Melbourne Institute, consumer sentiment fell 5.6% in May from April, due “to the combination of rising cost of living pressures and the prospect of rising interest rates”. Sentiment is now at “its lowest level since August 2020 when households were unnerved by the ‘second wave’ lockdown in Victoria”.

⚡ The Aussie government ($A1.4 billion pumped into hydrogen so far) better hope he’s wrong: Elon Musk said “If you want a means of energy storage, hydrogen is a bad choice…. It’s low-density… you need gigantic tanks to hold hydrogen in liquid form or lots of pressure to hold it in gas form.”

🗳️ A new YouGov poll showed Treasurer Frydenberg trailing independent candidate Monique Ryan by 53-47 on a two-party-preferred basis.

🚢 If the Coalition is re-elected it will build “a new $1 billion maintenance centre in Sydney” for warships, as well as “introduce measures to increase Australia’s merchant capacity”.

🔬 “A model by Chinese and US researchers suggested that, given China’s vaccine efficacy and coverage, an unchecked [COVID-19] outbreak… would overwhelm the country’s health system… [and] result in 1.5 million deaths.”

⚔️ ⁦On Ukraine: “The Russians are fighting like Zhukov. They send wave after wave but our guys figured out they fight just like Soviets. The tank commander is always in the first tank, so we shoot it.”

😬 Almost as dangerous a being a billionaire in China: “Alexander Subbotin is at least the seventh Russian oligarch to die under strange circumstances this year.”

🛰️ “Russia was behind a massive cyberattack against a satellite internet network which took tens of thousands of modems offline at the onset of Russia-Ukraine war.”

🐐 The “GOAT”, Tom Brady, “will join Fox Sports as its lead NFL analyst when his playing career ends… [on] a 10-year, $375 million contract – the most lucrative in sports broadcasting history”.

📈 Consumer prices in China rose 2.1% in April and producer prices grew 8.0%, both 0.3 percentage points above expectations “partly due to the lockdowns that caused disruption to supply chains”.

👎 Just 13% of respondents to a triple j survey of 18 to 29-year-olds believed that “our politicians are working in the best interests of Australia”, down from 29% in the 2020 survey.

🙈 China’s government removed a WHO Weibo post that criticised its “dynamic zero-COVID” policy: “We don’t think that it is sustainable considering the behaviour of the virus and what we now anticipate in the future.”

🚘 Toyota warned that “unprecedented” increases to its raw material costs may cut 20% off its full-year profits, adding that “we need to work to reduce the amount of materials we use as much as possible and to replace them with less expensive materials”.